Decision Diagnostics starts its turnaround

Now that Decision Diagnostics Corp. has cleared a litigation hurdle and the diabetes testing company is working to revitalize its balance sheet and effect a turnaround, its chief executive is talking confidently about the removal of the going-concern warning on it, a possible private-label deal and its attractiveness as an M&A candidate in the not-too-distant future.

"There has been a lot of upheaval in this business," said Keith Berman, the principal executive officer of Decision, about how the drastic drop in reimbursement rates is an opportunity for his company's low-cost Shasta GenStrip product. "The market has changed, and it has changed in a direction that helps us."

Until a federal appeals court handed down a favorable ruling last month, Decision's future hung in limbo. It was unclear whether the company would be allowed to sell its test strips at all.

To test blood glucose, a diabetic will prick a finger to draw blood, swab the blood with a testing strip, and then put the strip into a meter that reads the glucose level.

J&J responded to its new, much-smaller competitor by suing it for patent infringement, among other things.

On Nov. 4, however, the U.S. Circuit Court for Federal Claims ruled that Decision wasn't committing patent violation, overturning the U.S. District Court of the Northern District of California's ruling.

Now Decision can focus on trying to gain market share for its GenStrips, which also have the potential to garner a wider distribution network. In fact, Decision is in "end-stage" discussions with multiple retailers, including "the largest retailer in the world," to sell GenStrip under their private-label brands, Berman said in a phone interview.

That day, the Medicare reimbursement rate for the product Decision sells, glucose testing strips, dropped to $10.41 from about $37 earlier this year, according to the National Community Pharmacists Association.

The rate is expected to remain in the same range or to drop as low as $10.22 when prices reset in January.

Financially, Decision is in better shape to react to such a competitive climate than it was before, but it's not out of the woods.

The litigation with J&J lowered Decision's order intake by about $26.5 million between Jan. 1 2012, and Sept. 30 2013, and forced the company to nix its retail store strategy, according to its financial report for the quarter ended Sept. 30.

Also as of that date, Decision only had $41,548 in cash and $443,799 in working capital. Alpha Credit Resources, however, has agreed to give Decision a $12.5 million credit line, which the company estimates can take it to $250 million in sales. In addition, Decision in February will seek a $12.5 million bond from J&J, which had put it up in case it lost the patent infringement lawsuit.

Decision said in its quarterly filing that it may need $56 million in trade debt financing to cover its first year sales of GenStrip.

Furthermore, "if GenStrip sales go through the roof, we will need to raise some equity," Berman said. "But for now we have plenty of internal capital and a large working capital line of credit."

The last financial report included a going-concern warning, but Berman expects that label to disappear sometime next year.

All those factors may be dampening the giants' enthusiasm for the diabetes business. J&J is merging its LifeScan diabetes testing business into its Janssen Pharmaceutical subsidiary, and Berman has heard industry speculation that the company is considering a sale of both units. (J&J didn't respond to requests for a comment.)

Berman said Roche put its diabetes business on the block about a year ago. Roche officials didn't respond to requests for a comment. And Bayer weighed a sale of its Diabetes Care unit, but a spokesman confirmed that the company decided in 2012 to keep it.

Once Decision's turnaround effort bears fruit, Berman believes the company may become an attractive target as a small, lower-cost player in the diabetes care space, which the company expects will grow to more than $32 billion in 2017 from $22.5 billion in 2010.

Once positive catalyst may be the company's planned uplisting to the OTC QX from OTC Markets, where Decision currently trades under the symbol DECN.

"When we uplist, I think we'll get [M&A] interest," Berman said, adding that Decision would be open to considering a buyout "if the company that asked did not have Johnson & Johnson's habit of acquiring a company and then getting rid of everyone who works there, a common problem in M&A transactions involving large companies."

If Decision ends up hiring investment bankers to evaluate M&A opportunities in the future, Berman would want them to approach companies such as Medtronic Inc.and E.I. DuPont de Nemours and Co. Why? A takeover offer from the big four — J&J, Roche, Bayer, and Abbott — might raise antitrust concerns, he explained.

Furthermore, Decision advertises a price "as low as" $9.99 on its website, while J&J's strips, which are not sold directly by their maker, go for $68.88 per 50 strips on Walmart.com.

Berman dismissed the idea that J&J might start pricing its strip as low as Genstrip, since he thinks a competitive price would fall far short of the profit margins that the board and shareholders of a large company such as J&J expect.

Nor is Berman concerned about his company's reliance on meters made by J&J, which are used by 30% of testing diabetics. He believes the GenStrip business is stable because a lot of patients use LifeScan meters already, the overall market is mature, and all of the major players employ similar platforms.

New products would face hurdles, as they would need to secure Food and Drug Administration approval and meet the agency's increasingly stringent guidelines, Berman said.

J&J hasn't succeeded in securing FDA approval for a new strip or meter design that would change its 2001 Ultra meter specifications, he noted.

For that reason, if J&J were to get FDA approval for a new meter that wasn't compatible with Decision's strips, J&J would be shutting out the aftermarket sales for its own strips, too.

Meanwhile, Decision is diversifying its offerings away from reliance on J&J's meters. The company is developing two new products that are expected to conclude trials and seek FDA approval in 2014.

One project is a test strip that will be compatible with another major company's testing meter.

Berman doesn't expect that product to face the type of litigation that J&J brought against GenStrip.

In the wake of the ruling that overturned the most important of J&J's patent infringement claims, other companies "would have to get very creative in any lawsuit they brought against us," Berman said.

The Circuit Court's November ruling "has sent ripples throughout the entire industry," Berman added. "It put an end to the monopolies that each company had on its own product platform."

The second product Decision is working on is a glucose meter and strip combination that will have a sleek, pocket-sized design geared toward more mobile testing.

Berman recounted a business meeting he had this year in which four of the people at the table had diabetes, and all worked for diabetes products companies, but none felt comfortable testing their glucose levels during the meeting or stepping out to do so. Berman also said his wife, an elementary school teacher, has told him that glucose testing was a burdensome process for her students.

Berman plans to market the new product for business people on the road and kids at school and extracurricular events.

"Our product is made in the USA," he noted. "Our strip works on meters that people already own, and our business model works."

GenStrip™ test strips are a product of Shasta Technologies LLC and are not manufactured, distributed, endorsed, or approved by nor associated with LifeScan®, Inc. a Johnson & Johnson® Company, manufacturers and distributors of the OneTouch® Ultra® Family of Meters and OneTouch® Ultra® test strips. GenStrip™ is cleared for use with the OneTouch® Ultra®, Ultra®2 and UltraMini® family of meters. Please refer to the GenStrip™ product package and package insert for all product labeling.